Homebuilder Strength Could Mean Big Market Upside Potential in 2012

Scott Redler

Jan 10, 2012, 5:09 PM

(The following analysis was used by Jim Cramer for a segment on his show, Mad Money. Check out the segment below.)

Off the Charts with Cramer: HGX Tuesday, 10 January 2012 6:45 PM ET Mad Money's Cramer turns a technical eye on the HGX to see what the charts indicate about the resurgence in housing, as interpreted by ScottRedler, T3 Trading Group chief strategic officer Source: CNBC.com

Typically the stock market leads the economy by six months. Could we now be seeing signs in the market that the US economic recovery will pick up steam in the second half of 2012? The market is rallying the face of a weak Euro and strong dollar, buoyed by slowly improving economic data.

The home builders are another very encouraging sign right now. No one knows why this group is so strong right now. Perhaps they are indicating a bottom in the housing market on the horizon. This group has been very battered and bruised., so at least an uptick was not unexpected. Still, the rally has been more potent to the upside than anyone would have thought. An igniting move like this usually leads to more upside.

Technically we have seen five higher lows on the Daily Chart of the homebuilders ETF (XHB), which we haven't seen in several YEARS. The ETF is also above all major moving averages, another technical positive. If this rally continues to hold in the homebuilders, we could see the housing market follow over the next 6-18 months, which could be the foundation for a faster economic recovery.

I believe that 1410-1440 is a realistic target this year in S&P, IF the housing market can sustain some momentum. This could also lead the S&P to new highs the S&P by the end of 2014. When looking at the housing market, you have to realize its strength has major implications for the rest of the economy.

The bad news for those looking to get involved in the trade? The first, "easy part" of the move has already happened. Right now is probably a time to sit tight. We have seen investors get burned over the last year when chasing stocks orETFsafter big moves, and it is best now to wait for some kind of pullback.

The area I will be watching in the Housing Sector Index - HGX - will be $101.64-105.54.This would put it right between the 10-20 day moving averages. Strong groups typically hold this zone and would allow people in without being pigs. The line in the sand for a Composure change is the $97 zone, which, if breached, would suck the momentum out of this group.

The Index did push through a big trend line today through recent highs, again showing power and strength. This is not just a bottom feeder oversold bounce type of move. A break and close above this level opens the door for a move on the weekly chart to the $130 zone, although as mentioned I will wait for a pullback. That level coincides with the highs from March of 2010.

The S&P also looks great (and similar) technically. A break and close above 1292 opens the door for a move to 1320-1340 in this first quarter. Then, if we continue to get more positive data and good earnings, 1370 (last year’s high) is in play as the next resistance level perhaps by mid-Summer. Ultimately we may see 1410-1440 at some point this year!

IF housing gets better and we see a continued leading indicator like we’ve see with this group, the high end target is not out of question.

Back in mid-December we said a bottom was brewing in the OIH around $110-$112. It’s now at $121.25 looks to be on its way. Back on October 8th I gave a 75% chance on Real Money that the October 4th was the low of the year in the markets, and it could into the low for a long, long time.

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